Rupee above 18.50 vs Dh1 as India readies for 24% pay hikes

The Indian rupee touched an exchange rate of Rs18.50 against the UAE dirham (Rs67.97 vs $1) for a brief while before strengthening to Rs18.46 vs Dh1 at about 10.30am UAE time.

The rupee strengthened after the Reserve Bank of India (RBI), the country’s central bank, kept its policy rate on hold at 6.75 per cent on Tuesday.

The move was widely expected by analysts, with India’s Finance Minister readying to table the country’s annual budget by the end of this month.

In the budget, which will be presented on Monday, February 29, India’s Finance Minister Arun Jaitley is expected to shed light on how the government will implement a proposed 23.55 per cent average increase in the salaries of 10.3 million present and past government employees.

India’s spending on employee pay-outs will increase by Rs1.02 trillion (Dh55.18 billion) as a result of the latest proposed pay hikes.

Implementing the seventh pay commission’s recommendations will have a direct impact on inflation, which will in turn have an impact on the exchange rate of the Indian rupee.

The government usually accepts the broad proposals for pay revision made by the pay commission every 10 years. “The recommendations will be examined expeditiously and the government will take a final decision,” Jaitley said.

The RBI has a target of bringing inflation down to 5 per cent by March 2017 even as it hit a 15-month high of 5.61 per cent in December 2015.

On the other hand, oil prices that are hovering just above 13-year-lows should help bring inflation down, as should an expected good harvest during the upcoming Kharif season.

The Indian rupee has lost about 10 per cent of its value against the UAE dirham/US dollar in the past 12 months while the Asian currency has shed more than a third of its value in the past five years.

The rupee made an intra-day all-time low of Rs18.75 vs Dh1 (Rs68.85 vs $1) in late August 2013, but the currency recovered to Rs15.87 by May 22, 2014, gaining more than 15 per cent in less than nine months.

Since then, however, the Indian rupee has been on a downward spiral, sinking to close at Rs18.58 on January 28, 2016, its second lowest ever level.

How the government handles the implementation of the seventh pay commission and how inflation in general is tackled during Budget 2016, due to be announced on February 2016, will further decide how steady the rupee can remain in weeks and months to come.